Royal Bank of Scotland Group (LON:RBS) stands to be worst affected among UK banks if Labour wins the general election due to the party’s plans to fully nationalise the lender, HSBC said.
In a note to investors, HSBC said a Labour win would be a “big negative” for domestic banks, reflecting proposals for higher corporation tax, increased borrowing, restrictions on branch closures and a higher minimum wage.
The polls have suggested that an outright win by Labour is highly unlikely but HSBC said it was by no means impossible.
In the event of a Labour win, RBS, Lloyds Banking Group plc (LON:LLOY) and Barclays plc (LON:BARC) would see a sharp sell-off in its shares, HSBC said.
Labour plans to break up RBS...
RBS would suffer the biggest hit due to Labour’s proposal to nationalise and break up the bank, according to HSBC.
The bank is still more than 70% state owned after the government had to inject £45.5bn in a bailout during the 2008-09 financial crisis. RBS has since struggled to return to an annual profit and last year reported an eye-watering loss of £7bn.
In contrast, Lloyds Banking Group returned to private hands last month after the government sold its final stake in the bank almost a decade after its £20bn rescue deal. Unlike RBS, Lloyds has had a successful turnaround and in February reported its highest full year pre-tax profit in a decade.
Labour wants to launch a consultation on breaking up RBS into local public banks via a full nationalisation.
“It’s unclear how exactly this would be achieved, but we would anticipate that near-term the prospect would weigh on RBS’ share price,” HSBC said.
However, HBSC expects the SNP would oppose such a move if elected.
Labour’s policies to impact banks…
Labour’s manifesto calls for raising corporation tax to 26% from a current 18%, which HSBC believes would lead to a mid-single digit hit to the earnings per share of RBS, Lloyd sand Barclays plc (BARC).
The party plans to introduce a financial transaction tax, which means the stamp duty on equity share trading would be extended to a wider range of assets. The purpose of this tax on banks is to insure them against the costs of any future bailouts.
Labour also wants to introduce rules that would prevent banks from closing branches where there is a “clear local need”.
“This could naturally hamper the larger incumbents when trying to compete with new digital, challenger banks,” HSBC said.
A pledge to raise the minimum wage and increase labour regulation to make redundancy more expensive would also impact banks’ earnings.
Two positives for banks on Labour win…
Positives that may come out of a Labour win, however, include a possible softer Brexit and rising bond yields.
Labour has ruled out the prospect of leaving the European Union with no deal, arguing for a new trade deal or a transitional arrangement.
“We’re not entirely sure how that works from a negotiating position (what if the EU simply says ‘no’?), but if it leads to a ‘softer’ exit with less downside economic risk for the UK then we believe that in turn it should be positive for the UK domestic banks,” HSBC said.
HSBC added that by moving away from deficit reduction and back towards fiscal expansion, Labour’s investment plans point to an additional £250bn of borrowing over a 10-year period, which could lead to rising bond yields.
Lenders to see 'modest uplift' from Tory majority....
A Tory majority is the more likely scenario if election polls turn out to be a reliable indication of the results. Still, the Conservatives have seen their lead narrow in the latest polls.
While a Tory win would be considered the more favourable outcome for the banking sector, HSBC noted there would be some risks, including a second Scottish referendum.
HSBC expects the market would react with some “very modest relief” in the event of a strong Tory majority and that could in turn see a “modest uplift” to UK bank shares.
“We’re stressing ‘modest’ at this point, as we believe the market has assigned a low probability to any scenario other than a Conservative win, hence we believe there’s very little negative news in the price.”
Hung parliament would hurt banking shares….
A hung parliament would be the worst possible outcome for the UK as it would increase political uncertainty and delay Brexit negotiations, HSBC added.
“At a time when there is one major over-riding item on the immediate agenda (negotiating Brexit), this would bring significant uncertainty to proceedings,” HSBC said.
“ And of course the markets do not like uncertainty, so we believe it’s highly likely that the initial reaction to this outcome would be a sell-off of UK banks.”